The Price of the Mega-State

January 23, 2010

by Mario Rizzo  

The recent Supreme Court decision that “ruled that the government may not ban political spending by corporations in candidate elections” is a true victory for freedom of speech.   

What many people do not realize, however, is that both sides in this dispute had important and valid points. The terrible truth of the matter is that a large complex government is incompatible with political and personal freedom. It is not just the economic freedom in various sectors that is threatened by a large welfare and regulatory state. (Most classical liberal-oriented economists well understand the effect on economic liberty.) However, those other freedoms that modern-day social democrats (aka “liberals”) value are also threatened.  

The majority of the Court are right to say that campaign finance laws that restrict the freedom of corporations (and presumably labor unions) to participate in the campaigns for political candidates is a violation of freedom of speech. This is a basic freedom in a representative democracy. No amount of sophistry about whether corporations are real human beings, and so forth, is worthy of us. (See Ilya Somin’s post at the Volokh Conspiracy.) Corporations are just associations of human beings. Why should other institutions of civil society be rendered mute by the apparatus of compulsion and coercion?  

On the other hand, corporations and labor unions are not generally friends of freedom and the market. They want, as Adam Smith understood, special privileges: protection from competition by new entrants, special tax treatment, regulations that make their lives easier, and so forth. Public Choice economists have made many contributions to the theoretical and empirical analysis of these matters. (I must say the majority of the economics profession, even at this late date, still seems to be living in the fantasy world of optimal social-welfare enhancing policies. Let that pass.)  

As I have previously blogged, the ideals of the rule of law are degraded by the exigencies of the welfare-state, not only in the process of logrolling but in the process of making arbitrary, special-interest exceptions to rules of all kinds. Mega-states necessarily go beyond the proper realm of government: the general welfare – the benefit of each and all.  

So the decision the majority handed down has its costs. The decision the dissenters would have handed down also would have had its costs. Both are very high. And they are the result of the size and scope of the modern American state. There is no good solution, except to cut down the size of the state in a very substantial way. 

As long as we have freedom of speech (which I hope we shall continue to have) special interests will use their funds to get the proverbial concentrated benefits matched by dispersed, but greater, losses. Special interest legislation will more and more displace any semblance of the general interest.    

What we need is to create or restore a secular “religion” or dogma. We need a dogma of laissez-faire. As long as John Maynard Keynes’s argument in “The End of Laissez-Faire” is accepted (that is, we should put away the old classical liberal dogmas and decide each issue on its own merits), the special interests will be there to convince a “pragmatic” public that their policies are the ones that, on the merits, warrant support.  

I am not arguing for a non-rebuttable dogma, but a strong presumption. Government officials and politicians should feel a sense of trepidation when they propose schemes for our betterment.  

Unfortunately, it is not possible simply to construct such a public attitude. Nevertheless, I think that intellectuals can do their part. We should discard the idea that it is more “scientific” or more “objective” to follow an issue-by-issue approach to politics. We ought to recognize the instability of the “on its own merits” policy regime.  We need to focus on general rules that inhibit state action. We need to accept the lessons of constitutional political economy, public choice theory and slippery-slope analysis. We need a secular “religion” of laissez-faire.

Addendum: I should like to add a word of clarification. Ilya Somin makes an important distinction between the size and scope of the state. Although these usually are positively associated (that is, states of a large size also have a large scope of activities), it is scope that is the major problem in the respect that concerns me here. When a state has a large scope its activities are complex: many different functions with many interactions and hard-to-determine consequences. This makes it difficult for voters to know exactly what is going on and therefore opens them to “manipulation” by special interests. These interests can more effectively obscure the costs of their proposed policies and make them appear as if they are in the general interest when they are not.

19 Responses to “The Price of the Mega-State”

  1. chidemkurdas Says:

    “So the decision the majority handed down has it costs. The decision the dissenters would have handed down also would have had its costs. Both are very high. And they are the result of the size and scope of the modern American state.” Yes, lucrative rent seeking opportunities created by the size & scope of the state guarantee that resources will be spent to this end. The decision may be important in shaping how they’re spent, how they’re channeled, but would rent seeking be less if the Supreme Court had decided otherwise?


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  3. […] highly recommend this post by Mario Rizzo on the Supreme Court free-speech decision. Nobody has put it better. A tidbit: The terrible truth […]

  4. Pietro M. Says:

    I completely agree. I would like to say something longer, but I couldn’t overcome my ignorance in public choice to make my arguments acceptably defended. Anyway, I always thought that pragmatism is a bad habit of mind, tantamount to give up liberty for politicians’ discretion. And of course i firmly believe that limiting power is much more important than all the political quibbles between reps and dems.

    My stream of consciousness worked in this way: as it may appear optimal to constrain the actions of an economic agent that is subject to moral hazard, can it be optimal, considering the problems inherent in democratic decision making, to constrain the access to public coercion wielded to get privileges at other people’s expenses?

    Isn’t pluralism at risk of turning politics into an ochlocracy, in Bastiat’s “great fiction”, or in a race-to-the-bottom where benefits are privatized and costs are socialized? May pluralism be good in a free society but bad in the political process?

    This last sentence shows why I don’t like my stream of consciousness: if politics is a common (Caplan’s book argues this point quite well), isn’t it preferable to have a small elite of exploiters rather than having a pluralist society in which everyone’s aim is to get privileges at the expense of the rest of society? Isn’t (perfect) competition in these cases a race-to-the-bottom and monopoly optimal?

    I definetely hate this idea, but it seems so consequential that I can’t escape it. To save my soul, I would only add that, without the commons problem (collective decision-making), the whole argument crumbles down.


  5. I have some doubt that more freedom of speech for corporations and labor unions will improve the outlook for individual liberty in the US. Corporations and labor unions can both be seen as auxiliaries to the state. The forms in which these organizations exist have been laid by the state, in business law and labor law. Few corporations would continue to exist in anything like their present forms if the state stopped using its police to protect debtors from creditors in bankruptcy proceedings (if the state stopped granting limited liability). Labor unions would not continue to exist in their present forms if the state stopped ordering corporations to negotiate with labor unions.

    So the state has already granted favors to these particular groupings of interests, corporations and labor unions. The Supreme Court’s decision may be seen as extending another favor to these interests.

  6. jerol Says:

    I am curious as to why corporations can’t get too big in the opinions conservatives but government can. Large corporations function no better than government so why the suspicion? I think we are suspicious of anything we don’t understand. The complexity of government is little different from that of a large corporation, so why do we embrace business and afford them the trust we fail to give government. The reason for regulation is to correct past abuse and prevent it from happening again so if we could trust business there would be no need for regulation. It is not the government that threaten our liberty it is individuals with too much power and they may be in government or they may be in business.


  7. Excellent post! The default position should indeed be laissez faire. Everyone, even those who imagine all sorts of optimal government interventions, should be extremely skeptical of real world government interventions, since they have a demonstrated tendency to be far from optimal from anyone’s standard other than the rent-seeker.

    To Jerol: I think conservatives are frequently serving the interests of large corporations. And largeness isn’t the point anyway — the point is what powers the entity in question wields. Government has a monopoly of force, which is inherently dangerous. If a private firm has no special powers of compulsion and can only become large by serving its customers, then there’s nothing very troubling. OTOH, if the the private firm is granted de jure or de facto monopoly powers, or similar powers, it’s very disturbing.

    I’m not scared of Wal-mart. Goldman Sachs is a different matter. See this postfor details, and check the included links.

  8. Mario Rizzo Says:

    I agree with Charles Steele. As far as the free speech issue is concerned, the overwhelming consideration is that we ought not to allow the apparatus of coercion to silence peple organized as the other institutions of society.


  9. I’ve had considerable success helping leftists and progressives become skeptical of proposals for government action using this kind of argument. It’s also a pretty good touchstone to separate those who really think government can make things better from those who simply want power.


  10. […] via The Price of the Mega-State « ThinkMarkets. […]

  11. Terry Noel Says:

    Mario,

    I agree wholeheartedly. One thing we all need to keep in mind is that the government will NEVER embrace any version of laissez-faire. Congress, the President, and all the nameless bureaucrats that make up the public sector have too much to gain. The public will never do so either unless it is convinced that the hand that feeds it draws attention away from the one behind its back holding a leash.

    The battle is an intellectual one. In order to make hands-off the “default” position, we must explain, patiently and consistently, why it is in peoples’ best interest to return to rational self-interest as a guiding principle in forming public policy. Keep fighting the good fight and I will do the same.

    Terry

  12. Guillermo Barba Says:

    Excellent post. For a different perspective Robert Solow, yet another Nobel, preaches the alleged very damaging market failures and ignores the real unintended harmful consequences of interventions by social planners.

    http://www.tnr.com/article/books-and-arts/hedging-america?page=0,0


  13. The solution to this problem is a return to a limited state governed by the Constitution. Taken seriously, it is an incredibly limiting document.

    There are only 18 specific powers delegated to Congress by the States. They include the power “to provide and maintain a Navy.” But not a standing Army.

    In terms of recent debates, “all Duties, Imposts and Excises shall be uniform throughout the United States.” So much for the healthcare bill.

  14. chidemkurdas Says:

    That’s a very good point about the healthcare bill, Jerry. Hopefully the Supreme Court will get serious about applying the Constitution if the monster bill passes.

  15. Walker Todd Says:

    Constitutional convention voted down, 8-3, the proposal that included having Congress charter corporations. Hamilton later persuaded Congress to do it anyway under the argument of implied powers.
    Overall, this is a point where economists have no monopoly on the truth or even on a truthful process of reasoning. Lawyers need to listen to the economists, but the process also runs in reverse. Historians also should weigh in on this.
    Montesquieu (Spirit of the Laws), Madison (Federalist No. 10), and others explain how checks and balances are necessary to prevent coalitions (dare one call them “corporations” or “unions”?) from running roughshod over the rights/liberties of others with equal civil standing in the society. You may regard what Anglo-American custom has come to deem rights and liberties as “mere preferences” subject to state seizure (for corporate or union benefit?) in the name of efficiency, but you strike at the heart of the social order, if not at the heart of classical liberal market theory, if you allow any coalition to assert (a) limited personal liability for the actions of its principals (b) backed by the coercive power of the state. That is the major and attractive distinction between corporations and partnerships as forms of business organization. Giving equal rights of free speech to those asserting these privileges treads on dangerous ground if one takes the theory of checks and balances seriously. How can one effectively challenge/check the power-seeking (and check out Jack Welch at GE if you think corporate chieftains don’t seek power for its own sake) of entities that would not exist, at least not as they actually exist, were it not for (a) limited personal liability for the principals and (b) the coercive power of the state that charters them?


  16. Historian Robert Hessen’s work on corporations is seminal. As I recall his argument, the corporate form is a product of natural eveolutionary processes.

    In the 18th century, corporations were privileged and products of legislative charters. That is precisely what they are not today.

    The state intervenes in our lives every day in ways many of us don’t even perceive. It is not the intervened institutions that are at fault, but the state intervention.

    As always, I welcome Walker’s posts.


  17. In my view, it’s not about corporate rights (it’s irrelevant whether corporations are entities or have rights). It’s not about free speech (it’s a stretch to call spending money speech, but maybe such an argument could be made). It’s not about the first amendment and it’s irrelevant if there is not a right to spend money on political advertising in the first amendment, since the Ninth Amendment says that the failure of a right to be enumerated in the first 8 amendments can’t be construed to deny the right.

    It’s about the very federal scheme itself, and the Tenth Amendment, if any, which reinforces the limited and enumerated powers federal scheme, whereby the federal gov’t has only certain specified powers, instead of “plenary” powers that normal sovereign states do (see my post The Unique American Federal Government). There is no power granted to Congress to regulate such actions, as I note in Left-Liberals on Free Speech and Finance Campaign Laws.


  18. Yes, Hessen’s work is seminal and unfortunately ignored by people who pontificate ignorantly about “limited liability” etc. I discuss this in this post.


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